Wednesday, December 07, 2005

SEC Head Cox: Accounting Rule Complexity Hides Fraud

SEC Chairman Christopher Cox argued today that the complexity of accounting and auditing standards contributed to the fraud problems earlier in the decade. Cox argued that compliance with highly technical standards was used against investors instead of being used to protect investors and indicated that the PCAOB, SEC and FASB were looking at ways to streamline rules. One concern expressed was to reduce the number of sources of accounting standards. In a semi-related development, Cox also showed discomfort with the dominance of "Big Four" firms in public company audits and stated a desire to make it easier for non-Big Four firms to audit publicly-traded firms.

Cox could not have given small CPA firms and those favoring "Big GAAP, Small GAAP" a larger Christmas present. Reduction of complexity is certainly a desirable goal (see the Internal Revenue Code), but some researchers will be concerned that greater numbers of public company audits by mid-to-large firms as opposed to the Big Four may dilute audit quality. Time alone will tell whether these fears have merit.

Update: The Accounting Observer ( has some useful additional comments.


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